Why invest in opportunity zones?
The motivation to invest in opportunity zones lies in the tax savings involved. Investors have the option to put existing assets with accumulated capital gains into opportunity funds. These are private funds that invest at least 90% of their capital in opportunity zones.
Opportunity funds must invest in a manner designed to improve the opportunity zones. They can rehabilitate buildings and then lease them to businesses, for example. Investors can defer taxes on existing capital gains in opportunity funds until December 31, 2026, or until the assets are sold, if that happens at an earlier date.
Furthermore, investors who keep money in opportunity funds for at least five years can reduce their deferred capital gains tax burden by 10%. Those who stay invested in opportunity funds for at least seven years, meanwhile, can reduce their capital gains liability by 15%. Finally, investors who maintain opportunity fund investments for a total of 10 years pay no capital gains taxes on those investments.
The only way to get a piece of the opportunity zone action is to invest in one of these funds.
How to find opportunity zones
For an area to qualify as an opportunity zone, it must have a poverty rate of at least 20% or median family incomes of no greater than 80% of those of their surrounding areas. That area must be nominated for this designation by the state it’s located in. That nomination then needs to be certified by the Secretary of the U.S. Treasury via the IRS.
In other words, only truly economically distressed areas will ultimately qualify.
That said, there are currently more than 8,700 designated opportunity zones across all 50 U.S. states and the country’s various territories. Additionally, opportunity zones keep that designation for 10 years. Investors can access a complete list of opportunity zones via the U.S. Treasury Department's Community Development Financial Institutions Fund. The IRS maintains a list of opportunity zones as well.
Investing in opportunity zones is a good way to make money in real estate while helping communities in need. In fact, one might regard opportunity zones as a more socially conscious form of real estate investing. The fact that there’s a world of tax savings involved certainly doesn’t hurt, either.